Highlights

Strong brand image in South India

Puravankara is recognized as one of the most prestigious name in the residential real estate in South India. Incorporated in 1986, the company has so far completed 14 residential and one commercial project, covering ~3.77 mn sq. ft. of saleable area.

Project portfolio tilted towards residential, but diversification expected shortly

So far ~95% of the total saleable area of ~3.77 million sq ft is residential real estate such as apartment complexes, villas and townhouses. The company is however increasingly diversifying its portfolio to commercial complexes, office space, malls. Going forward, we expect the percentage of commercial projects in the company’s total sales to increase to 22% from 5% currently, leading to higher realisations and reduced revenue concentration.

High quality land bank

As on July 2, 2007, Puravankara has land bank comprising of 106.8 mn sq. ft. of saleable area. Out of this, 65% of the land is directly owned by the company; for the rest, it holds development rights either solely or through joint ventures (JVs). Puravankara has acquired land at a consideration of INR 7.9 billion (~INR 75 per sq ft. of saleable area), out of which, it has already paid for 88%. The company’s land bank, located across all major cities of South India (Bangalore 73%, Kochi 13%, and Chennai 9%), has been witnessing robust economic development over the years and is expected to maintain their growth momentum, going forward. Further, since a majority of the company’s land bank is within city limits, it is relatively less exposed to correction in property prices and command low capitalization rates as compared with Tier-2 and Tier-3 city land.

JVs, MOUs, and strategic partnerships to drive growth

Puravankara has entered into a JV (49:51) with Keppel Investment Mauritius Private Limited (Keppel), subsidiary of Singapore-based Keppel Land Limited, to develop 2.71 mn sq. ft. of land in Bangalore. This JV will provide the company an opportunity to leverage Keppel’s expertise and experience in developing world-class integrated township projects to scale up its operations. Puravankara has also entered into MOUs with certain strategic partners for the purchase/execution of joint development agreements aggregating to ~43.56 mn sq. ft. of land in and around Chennai, which does not form part of current land bank. This will give the company an opportunity to scale up its operations.

Valuations

Our current NAV estimate range is INR 440 - 445 per share, representing a discount of 10% and a premium of 1% from the IPO price of INR 400-450. We have discounted the cash flows at a WACC of 15% over a period of four years. We expect Puravankara’s MOU with strategic partner, for the joint development of ~43.56 mn sq. ft. of land, to provide an upside to the current valuation. We have valued the MOU at INR 46 per share considering a saleable area of MOU as 21.78 million sq ft (estimated as 50% of the MOU area of 43.56 million sq ft due to lack of clarity on MOU). The valuation of current land bank in combination with the MOU valuation represents a discount of 21% - 9% from the IPO price of INR 400-450. We are comfortable with the valuation at lower band of INR 400 considering successful execution of MOU.

Key Risks

Execution challenge

Till FY07 end, Puravankara has delivered 3.77 mn sq. ft. of land and aims to develop another ~106.8 mn sq. ft. over next 7-8 years. We believe that the company has the execution capabilities and will be able to deliver the same, but the timely completion of these projects is a strong execution challenge for the company. Any delay in the execution of projects will strain its cash flows and valuation, hampering the company’s growth prospects.

Regional concentration

Historically, Bangalore has contributed majorly to Puravankara’s total revenues and is expected to continue to do so. We expect ~76% of the company’s total revenues to come from this region, going forward. This poses a significant regional risk. Any significant correction in property prices in Bangalore or any sort of adverse change in government policies in that region will hurt the profitability and valuation of Puravankara.

Interest rate risk

The interest rates have seen an uptrend during the last year. Given that a bulk of sales are likely in the middle income salaried class, any further hike in housing interest rates will lead to a slowdown in real estate demand and will adversely affect the sales, profitability, and valuation of the company.